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Margin trading lets you borrow money from your broker to buy more securities. Here's how leverage works, what triggers a margin call.
This guide is designed for first-pass understanding. Start with core terms, then apply the framework in your own account workflow.
Margin trading lets you borrow money from your brokerage to buy more investments than you can afford with your own cash. It's leverage; and leverage is a double-edged sword that amplifies both your gains and your losses. Before you flip the margin switch on your brokerage account, you need to understand exactly how the math works and why so many people get burned.
When you buy on margin, you're using borrowed money from your broker to purchase securities. Your existing investments and cash serve as collateral for the loan. If you have $10,000 in your account, your broker might let you buy $20,000 worth of stocks; $10,000 of your money and $10,000 of theirs.
You pay interest on the borrowed amount, just like any loan. The difference is that if your investments drop below a certain level, your broker can force you to add more money or sell your positions; often at the worst possible time. This is the margin call, and it's where margin trading goes from exciting to devastating.
Margin is a standard feature of most brokerage accounts, and brokerages actively encourage it because they earn interest on the loans. That alone should tell you whose interests are really being served.
The Federal Reserve and FINRA set the rules for how much you can borrow:
Example: You have $10,000 cash and borrow $10,000 to buy $20,000 in stocks. Your equity is $10,000 (50%). If the stocks drop to $15,000, your equity is now $5,000 ($15,000 - $10,000 loan), which is 33% of $15,000. If your broker's maintenance requirement is 30%, you're still okay. But if stocks drop to $13,000, your equity is $3,000 (23%); below 25%, and you're getting a margin call.
A margin call is your broker demanding that you restore your account to the minimum equity level. When you get one, you typically have a few options:
Here's what most people don't realize: your broker doesn't have to give you time to respond. They can; and often will — sell your positions immediately without asking. They choose which positions to sell, not you. And they can sell at the worst possible moment, locking in losses that might have been temporary.
Margin trading means borrowing money from your broker to buy securities. With a typical 50% margin requirement, a $10,000 deposit lets you buy $20,000 worth of stocks. Your broker charges interest on the borrowed amount, and you must maintain a minimum equity level.
A margin call occurs when your account equity falls below the maintenance margin requirement (typically 25-30%). Your broker will demand you deposit more cash or sell positions immediately. If you don't act quickly, the broker can liquidate your positions without your consent.
Margin amplifies both gains and losses. A 20% decline on a 2x leveraged position means a 40% loss on your equity. You also pay interest on borrowed funds, and margin calls can force you to sell at the worst possible time during market downturns.
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Margin calls tend to happen during market crashes; exactly when you least want to be forced to sell. This is why margin magnifies losses in downturns: you're forced out of positions at the bottom instead of being able to hold through the recovery.
The appeal of margin is obvious when stocks go up. Let's compare a $10,000 investment with and without margin:
Without margin: You invest $10,000. Stocks rise 20%. Your portfolio is worth $12,000. Your gain: $2,000 (20%).
With 2x margin: You invest $10,000 of your money plus $10,000 borrowed, for $20,000 total. Stocks rise 20%. Your portfolio is worth $24,000. Subtract the $10,000 loan and your equity is $14,000. Your gain: $4,000 (40% return on your $10,000, minus interest).
Sounds great. Now the other direction:
Without margin: Stocks fall 20%. Portfolio worth $8,000. Loss: $2,000 (20%). Painful but survivable.
With 2x margin: Stocks fall 20%. Portfolio worth $16,000. Subtract the $10,000 loan and your equity is $6,000. Loss: $4,000 (40% of your money, plus interest). A 50% stock decline would wipe out your entire equity.
Stocks don't fall 50%? In 2020, many individual stocks fell 50% or more in weeks. In 2022, the Nasdaq dropped over 30%. If you were on 2x margin during those declines, your losses were doubled and you likely faced margin calls that forced you to sell near the bottom.
Margin isn't free; you pay interest on the borrowed amount. Rates vary by broker and by the size of your loan:
These rates add up. If you borrow $50,000 on margin at 10%, you're paying $5,000 per year in interest; regardless of how your investments perform. Your investments need to return more than the interest rate just to break even on the borrowed portion. The S&P 500's historical average return of 10% barely covers margin interest costs, meaning you're taking on significant risk for potentially zero additional return.
If you're trading on margin, you need to know about the Pattern Day Trader (PDT) rule. FINRA requires that anyone who makes four or more day trades (buying and selling the same security in the same day) within five business days, using a margin account, must maintain a minimum equity of $25,000.
If your account falls below $25,000, you're restricted from day trading until you deposit more money. This rule was designed to protect inexperienced traders from the risks of frequent leveraged trading — and it's widely debated whether it actually helps or just pushes risky trading into less regulated venues.
Key details: the PDT rule only applies to margin accounts, not cash accounts. It doesn't apply to accounts at non-US brokerages. And it doesn't apply to cryptocurrency exchanges, which operate under different regulations.
The case against margin for most investors is straightforward:
Warren Buffett has said it plainly: "When you combine ignorance and leverage, you get some pretty interesting results." He's never recommended margin investing for individual investors.
If regular margin trading is dangerous, crypto margin is another level entirely. Cryptocurrency exchanges offer leverage ratios that would make traditional brokers blush:
The vast majority of leveraged crypto traders lose money. The exchanges know this and profit from the liquidation fees. If you invest in crypto, do it with money you've deposited — never with borrowed money.
Margin isn't always wrong. There are limited scenarios where it can be a reasonable tool:
Notice what's not on the list: "because I think the market is going up." Conviction about direction doesn't reduce the risk of being wrong.
If you're a beginning or intermediate investor, don't use margin. Full stop. Your returns from consistent, unleveraged investing in index funds will almost certainly beat your margin-trading results, with a fraction of the stress and zero risk of forced liquidation.
If you already have margin positions, make sure you understand your maintenance requirements and have a plan for a 30-40% market decline. Don't wait for a margin call to figure out what you'll do — plan it now while you can think clearly.
Connect all your brokerage and crypto accounts to Clarity to get a complete picture of your leverage exposure. If you're using margin in one account while holding cash in another, you might be taking unnecessary risk. Seeing your full financial picture makes it easier to manage risk intelligently across all your accounts.
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